An explanation for the inverted-U relationship between competition and innovation

Ferdinand Rauch ()

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: The Dixit-Stiglitz model is extended by the possibility for rms to un- dertake process innovation. The model can provide a new explanation to describe the relationship that research activity of rms is positively corre- lated with product market competition at low levels of competition, and negatively at high levels that has been found in the data. The initial pos- itive relationship is caused by an increased business stealing opportunity with more competition, while the negative eect comes from the reduc- tion of the markup due to higher competition (measured as elasticity of substitution). Also the ambiguous relationship of market entry barriers with respect to research activity is discussed using a less general form of the model. This framework may also be used to explain the inverted-U relationship found between competition and advertising expenditures.

JEL-codes: L10 O3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ino, nep-mic and nep-tid
Date: 2008-12
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